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With the fall of Silicon Valley Bank and Signature Bank, many people are wondering if crypto played any role in the crumbling of both financial institutions as they were the number two and number three largest bank failures in US history.

Is Crypto to Blame?

These questions come largely because 2022 was marred by the collapse of FTX, a leading digital currency exchange that within three years, rose through the ranks to become a top five digital currency trading platform. Many experts, however, say crypto had nothing to do with the falls of the banks. David Yermack – professor of finance at NYU’s Stern School of Business – explained:

I don’t think crypto has much of a role. Crypto is more or less a bystander in all of this, just like all the other companies who had deposited money.

He stated there are two main issues that caused the banks to shutter. The first was banking regulations have been thinned out over the last six years, which caused the institutions to experience issues. The second was both companies were too concentrated in single areas. He said:

In the case of Silicon Valley Bank, [the concentration] would be the west coast technology industry, and if you’ve got a group of customers who can’t pay back their loans, and they’re all correlated with each other, suddenly they all can’t pay you back together. That makes those loans a lot less valuable.

Boston College law professor Patricia McCoy also threw her two cents into the mix, saying that holding large amounts of the crypto USDC didn’t help. She said:

At Silicon Valley Bank, really, the only role that the crypto industry played was this big deposit by Circle, which was very prone to run risk. When Circle became nervous that Silicon Valley Bank was in trouble, its natural response would be to immediately withdraw that entire very large deposit. Silicon Valley Bank did not have the money (the cash) to pay all the withdrawal requests. So, the fact that Circle had such a large deposit, and it was a type of client that was prone to panic, intensified the bank run at Silicon Valley Bank.

Banks Were too Lax

Yermack concluded with:

This gets right to the heart of the issue about how banks are supervised and regulated, that they really should have had to write those bonds down to value in real time and make the problems more apparent much earlier. As somebody who deals with financial data every day, I think everything should be marked to market value, and to the extent it’s not, you run the risk of misleading people, and it seems in this case, it was the banking regulators who were misled, and they just said, ‘Oh, those are government bonds. Those are the safest assets.’

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